Good faith money disincentivizes you from backing out for no reason. You can still back out for good reason.
Say you are selling your house. A buyer offers you 300k, and you take it. Buying a house is not like buying a bicycle, there is a lot of paperwork that goes into it. That takes time. From the buyer's perspective, they don't want to do a bunch of paperwork and inspections only to have the seller announce that he changed his mind and won't sell anymore. Therefore, when offers are converted into a contract where the seller agrees to not entertain offers from other buyers for some time (say 30 days) while the initial buyer is going through all the motions.
This creates a problem from the seller's perspective. What if you get a string of buyers that make a bid, enter the contract, and then keep saying on day 29 that they changed their mind and don't want to buy it anymore. You can't force them to buy it. As a matter of fact, proof of funds is not required to make an offer, so for all you know the guy "offering 300k" has 3 dollars to his name and couldn't get a loan to save his life. You could end up being unavailable to bids 97% of the time, which would really slow down your attempts at selling.
Therefore we have the contract to sell, but also we want only serious buyers to get to this stage. This is effected by taking a deposit from the buyer. The terms of the contract will say that if the buyer just "changes their mind", they have to give up the good faith money. The point is that if you're entering the contract, you should have already made up your mind about buying the house.
But on the other hand, you only get so close a look at the house while making an offer. You can't just hire an inspector to check every house you view before making an offer. So it's inevitable that you would do a cursory viewing, make an offer based on that, enter a contract, and after spending 3 weeks doing inspections find out that actually there is a serious problem with the house and had you known that, you would have never offered what you did. Or perhaps the purchase becomes impossible due to circumstances beyond your control. This is why contracts provide the buyer with some acceptable grounds to back out of the purchase without forfeiting the money.
In simple terms, it works something like this:
- I want to buy the house for X money
- Okay, I'll sell it to you for X
- Great, it will take me some time to get the X ready. Can you tell the other folks to hold off until then?
- Sure, but only if you really mean to buy it. Give me a deposit of Y so that if you change your mind frivolously I will keep the Y.
- Okay, but if I decide not to buy because I discover some serious problem then you have to return the Y.
- Fine, deal.
You mention also that your contract says you can "back out for no reason at all". That sounds like you may have misread it, because the seller has little reason to accept such a one sided contract. However, even if that is truly the case, the good faith money would still have some role - it would make it difficult for you to make many concurrent bids on different houses.